December 17, 2017

UBA economist Mariano Kestelboim

Wednesday, July 23, 2014

‘Country has favourable conditions to return to growth if it defaults’

By Francisco Aldaya
for the Herald

A new default, albeit technical due to the government’s willingness to pay but inability to do so due to externally imposed factors, now seems a distinct possibility. It would significantly limit access to credit lines and intensify an unfolding recession, but would not be a catastrophe due to a solid current account balance and favourable conditions for growth, such as the development of Vaca Muerta, UBA economist Mariano Kestelboim told the Herald.

What would be the most significant consequences of a default at the end of the month?

The most important consequence would be the restriction of province’s and the federal government’s access to voluntary international credit markets, which would undermine everything that has been done to return to them, such as the settlement with the Paris Club and Repsol and the reform of the INDEC’s statistics.

For how long would access be limited?

Until the situation is normalized. In the general context of the economy, a default would be a paradox. Argentina has a very small current account deficit, one percent of GDP, when before the 2001 default, it had piled up 10 years of a deficit at six or seven percent. Comparatively speaking, we are in a fairly normal situation right now. I would say that the effects of a default will last in the middle-term, but Argentina has very solid conditions to return to growth: vast natural resources and a context of very high liquidity at the international level.

What about the immediate consequences?

A large amount of litigation would be started against the country. For instance, the 2033 Discount bonds (for which Argentina made the US$539 million deposit currently frozen in a Bank of New York Mellon account) and other notes have an acceleration clause that, if triggered by creditors’ lawsuits, would push their yield date forward, potentially to this year. I don’t see any investors not taking advantage of that clause.

What else?

Aside from governments, multinational companies’ access to foreign loans would be significantly undermined. In default, neither is allowed to take on such debt. For instance, Ford would find it difficult to get a loan in New York to pay importers in Argentina.

What will happen in terms of economic recession?

The whole process will be intensified. For every percent of growth, Argentina needs imports to rise by four points. In a context of limited access to dollars, it would be very hard to do that. The government would struggle to keep up its expansive fiscal policy amid higher demand.

What about alternative credit channels, such as China?

They would be crucial. The currency swap with China, agreements with UNASUR and eventually the new BRICS bank would be the only option for the government in that sense.


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